Do you wonder how BlackRock makes money? In this write up, we explore the Business Model of BlackRock to explain and understand how the Business Model of the investment giant is structured.
BlackRock is an international investment management corporation, recognized as the world’s largest asset manager, as of my knowledge cut-off in September 2021. It was founded in 1988 by Larry Fink, Robert S. Kapito, Susan Wagner, Ben Golub, Ralph Schlosstein, and Keith Anderson. This group of ambitious individuals was intent on crafting an unassailable strategy that would make BlackRock a titan in the financial industry. This blog post aims to dissect BlackRock’s business model using the framework provided by Alexander Osterwalder’s Business Model Canvas (BMC).
The BMC is a strategic management and entrepreneurial tool that enables organizations to describe, design, challenge, invent, and pivot their business models. It consists of nine fundamental building blocks: customer segments, value propositions, channels, customer relationships, revenue streams, key resources, key activities, key partnerships, and cost structure.
BlackRock’s inception is rooted in the response to the Wall Street mortgage securities debacle of the mid-1980s. The founders were then part of The First Boston Corporation, a major investment bank. They witnessed firsthand the lack of risk management tools and the devastating impact of this oversight on the market. The founders, led by Larry Fink, were inspired to create a company that would provide risk management services to the financial industry. The aim was to ensure that the financial community was better prepared to understand and manage investment risks.
BlackRock serves a diverse range of customers across different segments. The customers include retail investors, institutional investors, and governments. The retail investors are individuals who invest in various securities for personal gains. The institutional investors, on the other hand, consist of pension funds, insurance companies, endowments, and sovereign wealth funds. Governments around the world also rely on BlackRock’s advisory services for financial market operations and management.
BlackRock’s value proposition revolves around providing comprehensive and innovative investment and risk management solutions. The company leverages its proprietary technology platform, Aladdin, to analyze risk and provide portfolio management solutions. Aladdin’s risk analytics are an industry benchmark and allow BlackRock to offer distinctive risk management services to its clients.
BlackRock utilizes both direct and indirect channels to reach its customers. The direct channels include its offices in 30 countries and a robust online presence. Indirect channels include broker-dealers, banks, and insurance companies. These intermediaries help distribute BlackRock’s products, such as mutual funds and iShares ETFs, to the retail investors.
BlackRock prioritizes establishing and maintaining strong relationships with its customers. The company provides personalized advisory services and maintains direct communication with its clients. For retail clients, BlackRock provides various resources, including educational materials and tools, to help them understand and manage their investments.
BlackRock’s primary revenue streams are management fees, performance fees, and technology services. Management fees are earned from the assets under management (AUM). Performance fees are charged based on the performance of certain investment funds against their benchmarks. Technology services, such as the Aladdin platform, generate revenue from subscriptions and advisory services.
BlackRock’s key resources include its human capital, technology platform, brand reputation, and the large scale of its assets under management. The company’s team of experienced professionals and its cutting-edge technology platform, Aladdin, set it apart in the competitive financial market.
BlackRock’s key activities involve asset management, risk analysis, technology development, and client servicing. Asset management entails making investment decisions and managing portfolios for clients. Risk analysis involves evaluating and managing investment risks. The company also invests heavily in technology development, consistently updating and upgrading its Aladdin platform to stay ahead of the curve. Client servicing involves maintaining relationships with existing clients and attracting new ones.
BlackRock’s key partnerships include its relationships with broker-dealers, banks, and insurance companies, who distribute its products. The company also collaborates with technology firms to enhance its Aladdin platform and other technological capabilities. Moreover, it forms strategic alliances with other asset management firms for product development and knowledge sharing.
BlackRock’s cost structure is primarily composed of employee compensation, office and technology expenses, and direct fund expenses. Employee compensation makes up the largest portion of its expenses, given the firm’s reliance on human capital. The company also invests heavily in maintaining and upgrading its technology and infrastructure.
Now that we have an understanding of BlackRock’s business model, let’s explore the story behind the company’s creation, which is instrumental in comprehending the reasons for its success.
In 1986, Larry Fink, then a rising star at First Boston, suffered a career setback when a department he ran incurred significant losses due to poorly understood investment risks. The experience taught Fink a valuable lesson: the importance of risk management in finance. He recognized a gap in the financial services industry – a lack of sophisticated risk management tools that could help investors understand and manage the risks associated with their investments.
Fink, along with other founding partners, decided to start a company that could fill this gap. In 1988, BlackRock was founded, initially as a risk management consultancy. From its inception, the company was focused on providing reliable risk management services. It used proprietary technology to analyze and understand investment risks, which set it apart from other financial institutions at the time.
For instance, BlackRock was among the first companies to identify the risks associated with mortgage-backed securities, which were a major contributor to the 2008 financial crisis. The company’s early focus on risk management and the use of technology to analyze investment risks have been instrumental in its success.
BlackRock’s growth trajectory took a significant turn in 1999 when it was acquired by PNC Financial Services. With PNC’s backing, BlackRock was able to expand its services beyond risk management to include asset management. This expansion allowed the company to serve a broader range of customers, including institutional investors and retail investors, which significantly increased its assets under management.
In 2009, BlackRock made another strategic move by acquiring Barclays Global Investors, which included the iShares ETFs. This acquisition propelled BlackRock to become the largest asset manager globally, with a diverse product portfolio that included mutual funds, ETFs, and other investment products.
The success of BlackRock is a testament to the effectiveness of its business model, which combines a deep understanding of investment risks with innovative technology. The company’s emphasis on risk management, enabled by its proprietary Aladdin technology, has allowed it to navigate the complex world of finance and consistently provide value to its clients.
In conclusion, BlackRock’s business model, as analyzed through the lens of Alexander Osterwalder’s Business Model Canvas, demonstrates a comprehensive understanding of its customers, a strong value proposition, effective channels, and robust customer relationships. The firm’s revenue streams, key resources, activities, partnerships, and cost structures all harmonize to make BlackRock a paragon of success in the asset management industry.
As we move forward into an era marked by rapid technological changes and increasing financial complexities, BlackRock’s emphasis on innovation and risk management, along with its commitment to serving the best interests of its clients, positions it favorably to continue its leadership in the global financial market.
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